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Environmental policy competition and differential tax treatment; a case for tighter coordination?

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Author Info
Richard Nahuis
Paul Tang

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Abstract

The Kyoto Protocol binds the level of greenhouse gas emissions in participating countries. It does not, however, dictate how the countries are to achieve this level. The economic costs of reaching emission targets are generally evaluated to be low. For example, evaluations with applied general-equilibrium models estimate the costs to be in the range of 0.2% to 0.5% of GDP, when international trade in emissions rights among governments is allowed for. We argue that important costs are overlooked since governments have an incentive to choose highly distorting tax schemes.

This paper shows that governments generally choose different energy tax rates for households and for internationally operating firms as the result of tax competition or pollution competition: in the first case, governments try to undercut other governments to attract firms to their country, whereas in the second, they try to push dirty industries across the border. In both cases, the incentive for firms and households to use or save energy is different at the margin. Both cases call for coordination of climate change policies that goes beyond a binding ceiling on greenhouse gas emissions and international trade in permit rights among governments alone.

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Paper provided by CPB Netherlands Bureau for Economic Policy Analysis in its series CPB Discussion Papers with number 50.

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Date of creation: Oct 2005
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Handle: RePEc:cpb:discus:50

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Related research
Keywords: energy taxes; tax competition; climate change policies;

Find related papers by JEL classification:
H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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    Other versions:
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  14. Baldwin, Richard E. & Krugman, Paul, 2004. "Agglomeration, integration and tax harmonisation," European Economic Review, Elsevier, vol. 48(1), pages 1-23, February. [Downloadable!] (restricted)
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